WASHINGTON POST:

"...Fearing Recession"

By David Ignatius Sunday, September 17, 2000; Page B07

LONDON  For an American who remembers the gas lines of the 1970s, the images here this past week were depressingly familiar: streets nearly empty of their normal traffic at midday; taxi drivers obsessively trading information about where to get their fill-up; political leaders posturing to reassure a public caught between panic and rage.

The ayatollahs in this new energy crisis are rampaging truck drivers. As oil prices pushed toward $35 a barrel, these truckers--essentially small businessmen on wheels--blocked traffic to demand a rollback of energy taxes. Their movement started in France two weeks ago and spread across Europe like a paralyzing virus.

The British papers were in a state of semi-hysteria: "Britain grinds to a halt as [Prime Minister] Blair's pleas are ignored," screamed the Guardian on Thursday. For Brits, the politicians' inability to stop the blockade recalled the days when trade unions had a stranglehold on the country. For me, it had the "America Held Hostage" feel of the Carter years--that same sense of a world spinning out of control, at the mercy of mysterious and unpredictable forces.

The retro picture became complete when one of Europe's leading central bankers confided that he fears this new energy crisis may end in "stagflation," the trademark 1970s disease that combined slow growth and inflation. My central banker friend predicted that the oil shock may slice up to a full percentage point off expected GDP growth around the world over the next year. It could stop the growth spurt that, until recently, had been reviving the European and Japanese economies. Worse, it will add new inflationary pressures, which could force Fed chairman Alan Greenspan and other central bankers to raise interest rates, further slowing the economy. That could upset the "soft landing" Greenspan has so carefully engineered in the United States.

James Wolfensohn, the president of the World Bank, made a similar warning in an interview Friday with the International Herald Tribune. A $10 shift in oil prices could cut global growth by at least a half a percentage point, he said.

The problem with "oil shocks," as last week's news reminds us, is that they really do shock the economic nervous system. As higher energy costs roll through the economy, they push up prices for everything that uses energy. Angry workers then begin demanding higher wages to compensate--and the inflation contagion is loose. The oil shocks don't just make the economy feverish, they also sap its strength. Money that would go into new investment or consumer spending at home is instead pumped out to foreign oil producers or drained into government fuel-tax coffers.

Why are economies so vulnerable to these sudden, short-term spikes in the price of a commodity that comes bubbling out of the ground? The answer is that oil is what economists call an "exogenous" variable. In other words, it's outside the normal economic model. Because oil is a "political" commodity--controlled in the short run by OPEC ministers and Iraqi dictators--its price can jump suddenly and unpredictably. In that sense, oil shocks are like wars, earthquakes or hurricanes--disasters that, although man-made, can't easily be anticipated or prevented.

We've been here before. The 1973 Arab oil embargo set in motion a downward cycle of wage-price controls, gas lines, slower growth and those pathetic "Whip Inflation Now" buttons that symbolized the feebleness of the Ford presidency. The Iranian revolution of 1979 began a convolution that more than doubled oil prices--bringing more gas lines, a U.S. inflation rate over 13 percent and the "malaise" that destroyed Jimmy Carter's presidency. Iraq's 1990 invasion of Kuwait produced another oil shock and the recession that helped defeat George Bush.

Oil is dangerous stuff. It destroys presidents and prime ministers. Although the United States so far has avoided the panic that is sweeping Europe, this crisis is drifting toward America like a fall hurricane, just visible now on the radar far across the Atlantic.

Politicians rage at their powerlessness in times like this, and they're tempted to offer the public a quick fix that distorts the market and offers the illusion of control. But they're forgetting the one overwhelming lesson of the 1970s. The market really is the best discipline for this political commodity. The oil crises of the '70s gave way to a nearly 20 years of low and relatively stable prices.

An economist's response to gas lines, of course, would be to let prices rise even more. A few more months of high prices and Americans will stop buying their goofy sports utility vehicles, European governments will finally reform their bloated tax systems and greedy OPEC oil ministers will be back to $15 a barrel oil. But economists don't get elected president.

The best political strategy is to avoid the panicky quick fixes of the '70s and ride this one out. "Stagflation" is partly a state of mind, and sound economic policies will be the best preventive medicine. Market forces may not fix the oil mess as quickly as we'd like, but grandstanding politicians will almost surely make it worse.

http://pub3.ezboard.com/fdownstreamventurespetroleummarkets.showMessage?topicID=1414.topic

-- Carl Jenkins (Somewherepress@aol.com), September 17, 2000

Answers

The writer is right. In time prices alone will even out the market. But, will the panic-prone politicians wait. If past history is any indicator, the answer is a simple no.

-- Wellesley (wellesley@freepot.net), September 17, 2000.

A recession is always preceded by a stock market blow-out some six to nine months before hand. That would mean that the stock market blow out could come any day now.

-- Wayward (wayward@webtv.net), September 17, 2000.